Before anyone had time to fully explain June's inflation numbers, the growls had already begun on trading desks and research shops:
Maybe in two weeks the Fed will raise interest rates by a full percentage point — the most at a single meeting in its modern history.
This increasingly likely scenario shows the jam the Fed has gotten itself into, with Fed officials seeking to express to the country a whatever-it-takes attitude. Neil Irwin and Courtenay Brown say that’s put them in a corner.
It’s a precarious situation where high inflation reports demand a mounting series of interest rate hikes and other policy moves that end with reduced consumer and business spending and a cratering economy.
Just last month, a high May inflation reading drove Fed leaders to make a last-minute shift to raise interest rates by 75 basis points, not the 50-point increase they had been signaling.
Well, here we go again. Wednesday's BLS report showed a 9.1% rise in the Consumer Price Index over the last year — and perhaps more significantly, the uptick of monthly core inflation to 0.7% in June.
And yesterday’s Producer Price Index, which essentially reflects wholesale prices charged to retailers, was even higher – at 11.3%.
It was a "major league disappointment," as Fed governor Christopher Waller said in a speech afterwards. The stock markets agreed.
The reports set off alarm bells throughout the financial world that recent history would repeat itself and, by day's end, the CME futures markets would almost fully price in a one-percentage-point rate hike at the end of the month.
By Dave Allen for Discount Gold & Silver
Before anyone had time to fully explain June's inflation numbers, the growls had already begun on trading desks and research shops:
Maybe in two weeks the Fed will raise interest rates by a full percentage point — the most at a single meeting in its modern history.
This increasingly likely scenario shows the jam the Fed has gotten itself into, with Fed officials seeking to express to the country a whatever-it-takes attitude. Neil Irwin and Courtenay Brown say that’s put them in a corner.
It’s a precarious situation where high inflation reports demand a mounting series of interest rate hikes and other policy moves that end with reduced consumer and business spending and a cratering economy.
Just last month, a high May inflation reading drove Fed leaders to make a last-minute shift to raise interest rates by 75 basis points, not the 50-point increase they had been signaling.
Well, here we go again. Wednesday's BLS report showed a 9.1% rise in the Consumer Price Index over the last year — and perhaps more significantly, the uptick of monthly core inflation to 0.7% in June.
And yesterday’s Producer Price Index, which essentially reflects wholesale prices charged to retailers, was even higher – at 11.3%.
It was a "major league disappointment," as Fed governor Christopher Waller said in a speech afterwards. The stock markets agreed.
The reports set off alarm bells throughout the financial world that recent history would repeat itself and, by day's end, the CME futures markets would almost fully price in a one-percentage-point rate hike at the end of the month.
The handful of Fed officials who have spoken publicly since the release have appeared open-minded about whether escalating inflation requires an in-kind policy response.
In Waller's talk, he said he currently favors sticking to a 0.75 percentage point rate hike.
But if retail sales (due today) and housing data (next week) are "materially stronger than expected,” he would lean towards a larger hike at the next meeting.
So, to the extent the Fed responds to high inflation readings, not just with rate increases – but with increasingly larger rate increases – it's all but inevitable it will over-tighten monetary policy and cause more economic pain (primarily layoffs and diminished company earnings) than is necessary.
Followed to its logical conclusion, Brown and Irwin believe “it would mean eventually ending up with an excessively restrictive policy,”
That will come, they added, “as the Fed makes ever-bigger policy moves in response to what’s happened in the past as opposed to what it thinks will happen in the future.”
Evercore ISI vice chair Krishna Guha said, "Simply chasing headline inflation higher with ever-larger units of hiking and a backward-looking outcome-based rule for stopping raising rates is likely to end badly."
As Kansas City Fed president Esther George – generally a monetary hawk who dissented at the June meeting – said this week, "Moving interest rates too fast raises the prospect of oversteering."
The Fed has spent the last year behind the curve in fighting inflation, assuming all the while that it was transitory. But, as we’ve been saying, there is danger in trying to fix it all at once.
Recession Coming? So What!
So, Wall Street has been pricing in the growing risk of a recession as soaring inflation breaches a new peak and the Fed hikes interest rates right into stagflation.
But if you ask JPMorgan Chase CEO Jamie Dimon, businesses are in good shape and consumer spending — the backbone of the economy — is strong because workers have more income and "jobs are plentiful."
Dimon told analysts this morning on his 2nd quarter earnings call that households are spending 10% more than they did last year and about 30% more than in 2019.
(Editor’s Note: the bank fell short of Wall Street expectations, with a 28% decline in year-over-year profits.)
But have no doubt, inflation is eating into take-home pay, making more people rely on credit cards and home equity, which will undoubtedly undermine growth going forward.
If you haven't received a big pay raise this year, your inflation-adjusted wages are falling.
That’s one consequence of high inflation, which is causing the sharpest decline in real wages in decades.
Real, inflation-adjusted wages are where the rubber hits the road. High inflation means that even in a strong job market, the typical worker ends up financially worse off with every month that passes.
Since December, average hourly earnings for private-sector workers are up 2.2%. That normally wouldn't be too shabby for a 6-month period, except that consumer prices rose 5.4% since then.
Over the last 12 months, the average pay for non-managerial workers is down 2.7% after factoring in inflation – the steepest drop since 1980.
There's been some debate about why public opinion on the economy is sharply negative despite a healthy job market, where there are two job openings for every worker.
The data on real wages make it not so much of a mystery at all.
Anna Kolubova writes that the strong dollar has been hurting gold's price lately, “dragging it down to 8-month lows as it steals its safe-haven appeal.”
But, according to too big to fail bank Wells Fargo, not to worry: gold can still end the year above $2,000 an ounce.
Wells strategy head John LaForge observed, "The U.S. dollar has risen 12% since the start of the year. Almost half of that gain has come in the last month.
“Such big moves are quite rare, but when they do happen, commodity prices typically suffer because most commodities are priced in U.S. dollars."
As Golubova adds, the broader commodities index “has also suffered due to higher dollar and rising recession fears, hurting the demand outlook for industrial and precious metals.”
LaForge continued, "Considering the strength in the U.S. dollar over the past month, it is not surprising that most commodity prices have been falling, gold especially."
Going forward, Wells Fargo is not expecting another significant move higher by the dollar, seeing it near its peak.
Wells Fargo's year-end gold price target is still at $2,050 an ounce, which LaForge sees as reasonably achievable due to the increasing likelihood of a recession.
“With recession around the corner,” he said, “and gold being quite cheap versus most other commodities, investors may begin to buy (more).”
Don’t wait for gold and silver to surge to the next level; consider adding more to your portfolio now to lock into today’s prices.